Las Vegas party haunted by watchdog?

I joined over 10,000 colleagues in Las Vegas recently for the Money 20/20 Conference. It was a fantastic gathering of entrepreneurs, regulators, and others who were interested in FinTech and payments. There were several terrific presentations from all sectors of the industry – established financial institutions, start-up companies, investors, and a host of others. But by far, one of the biggest draws was Director Richard Cordray, the Director of the Consumer Financial Protection Bureau, who spoke to the conference on the opening night.

The CFPB can be, to say the least, an “anxiety producing” agency. It has authorities to promulgate far-reaching rules across entire markets, to conduct intrusive supervisory examinations, and to aggressively enforce the federal consumer protection laws, including a flexible authority to penalize “unfair, deceptive, or abusive” acts or practices. The Bureau has independent litigation authority, and the ability to impose fines in the hundreds of millions of dollars, restitution orders, and injunctive relief. And, as some companies have realized, in the wake of every enforcement action runs the risk of criminal investigations, follow-on private lawsuits, political inquiries, or at the very least, serious reputational damage.

Now consider the audience at the Money 20/20 Conference: they are innovators in this space; they develop new products and services with untested regulatory expectations; they often seek capital funding, business partnerships, and consumer trust and acceptance. So they are especially likely to feel the sting of a regulatory enforcement action. Because a “sting” for an established, well-funded financial institution can be an existential crisis for a start-up. Perhaps because they are new, they’ve often been greeted with suspicion from regulators and law enforcement. Remember that just a few years ago, when discussing virtual currencies, Director Cordray remarked that “at this point consumers are stepping into the Wild West when they engage in the market,” and noted that the Bureau would begin to track complaints from consumers about virtual currency companies. A Bureau advisory titled “Risks to Consumers Posed by Virtual Currencies” warned: “So before you get involved, it’s important to note what can go wrong.” For many of these innovative companies, regulatory uncertainty and the threat of enforcement actions makes for a hostile climate, and there is legitimate concern that excessive regulation will stifle and suffocate the industry. So that’s the backdrop.

For all of the anxiety that the agency produces, Director Cordray struck a very conciliatory and measured tone during his remarks at the Money 20/20 Conference. He acknowledged the Bureau’s enforcement actions against certain FinTech providers, but stressed that:

[t]hese should not be misread or overread. Everyone who provides consumers with financial products must adhere to the same standards and will be held to the same expectations. But we are not looking to punish anyone merely for raising novel issues that present unsettled points of law or questions that fall into unforeseen cracks in the regulatory framework.

Director Cordray also noted, in many ways, a common cause with the FinTech industry: he applauded the innovative efforts that FinTech businesses sought for financial inclusion, to serve the unbanked and under-banked around the world, and for consumer empowerment. He recognized that innovating financial service companies were responsible for “new developments in payments, transactions, lending, underwriting, budgeting, money management, and other areas and well.” He stressed that the Bureau’s data-driven, technology-driven commitments, and its transformative approach to regulation, give the agency a shared affinity with the FinTech industry, along with “a growing enthusiasm for finding ways to leapfrog forward to products that are more accessible, more affordable, more convenient, and more empowering of consumers.”

Notably, Director Cordray’s most serious criticism wasn’t against the FinTech providers themselves, but to certain companies who sought to keep them out of the market: “[W]e are gravely concerned by reports that some financial institutions are looking for ways to limit, or even shut off, access to financial data rather than exploring ways to make sure that such access, once granted, is safe and secure.” This was a reference to some banks’ efforts to prevent “screen scraping” by money management websites and financial aggregation companies who (with customer permission) access consumers’ financial information, and then place it onto a single platform for budget, portfolio review, or other purposes. Director Cordray was direct about the Bureau’s position: “Let me state this as clearly as I can here: We believe consumers should be able to access this information and give their permission for third-party companies to access this information as well.” In short, the CFPB Director recognized that a critical part of financial innovation was the development of these “creative new tools [that] can help working families better manage their finances” through technology. And, as a corollary, he was concerned – “gravely concerned” – that established financial institutions were unfairly cutting off access to this information to keep these innovators out of the market.

Of course, FinTech companies will be most concerned with what occurs “on the ground”: what the next CFPB enforcement action against a FinTech provider looks like, and how much damage it does; how the Bureau’s interpretation of an existing regulation is interpreted as applied to a new financial services product; whether initiatives such as the CFPB’s Project Catalyst will provide any comfort to innovators navigating an uncertain regulatory environment; or whether the Bureau’s “no action” letter policy will give meaningful oxygen to allow FinTech providers to grow. All of that – and certainly more – will be on the minds of FinTech innovators, their compliance officers, and their investors. But Director Cordray’s remarks showed the audience the face of the Bureau; and this face was not an angry one.